Energy Market Watch: Banks, Tanks & No Thanks

The September Markets Watch arrives after a much-needed bank holiday (U.S. Labor Day) to a steady stream of even more bank-related news. To begin with, this month’s Central Bank meeting in Turkey would’ve been too perfect if it were held in November (think of the puns!), but I’m not sure Erdogan is a frequent reader of Market Watch. Also bank-related, interest rates in the U.S. are likely to see another increase.

In addition to bank talk, this month’s watch covers the occasionally strange and strained relations between China, North Korea and the U.S., Autumn’s effect on (natural gas) tanks and Greece’s efforts to move Macedonia from “no thanks” to “no problem” on a name change.

Sept. 9 – Xi Jinping to visit North Korea

While North Korean leader Kim Jong Un has made several visits to its on-again-off-again ally, China, Chinese President Xi Jinping has never set foot in North Korea. Early this month, that’s expected to change when President Xi visits Pyongyang at a time with heightened geopolitical and economic ramifications. Following U.S. President Donald Trump’s historic (and generally friendly) summit with Kim Jong Un, the relationship has soured a bit. Trump accused China of interfering in the peace process that has seen North Korea make little effort to dismantle its nuclear program.

Questions surround the tone and context of Xi’s historic visit to North Korea. North Korean sanctions have had limited impact on the global energy economy, but other aspects have major importance. Principally, a potential escalation of a U.S.-China trade war, which could take a combative turn if the U.S. perceives the China-North Korea summit as undermining U.S. diplomatic efforts. A trade war means less trade overall and that could have major ramifications on energy prices.

Currency traders generally prefer independent central banks, but in Turkey, President Recep Erdogan has been pushing for low interest rates. That’s despite a call from many economists for Turkey to raise its rates to combat skyrocketing inflation. As faith in the Turkish Lira declines, the problem accelerates, and the cost of foreign goods skyrockets.

For example, over the past year, oil prices have increased 40% in U.S. dollars. That’s caused some extra pain at the pump for U.S. drivers, but when converted to Turkish Lira, that same oil has increased in price by as much as 180%! The same is true for any number of imported goods, with high costs threatening to send Turkey into recession. And since no country is an island unto itself, the fear is Turkey’s woes could spread.

So far that hasn’t happened at a significant level, but if you’re wondering why your Wall Street portfolio is fluctuating mid-month, the answer may be in Istanbul (not Constantinople).

Sept. 22 – Autumn Equinox (Start of Fall)

Nothing fundamentally different for energy markets happens on September 22, but it’s hard to underestimate the impact of the broader seasonal change it represents. As the U.S. market leaves summer behind, natural gas enters “shoulder season,” the period between the peak demand created by higher or low temperatures in the middle of summer and winter.

This shoulder season, gas producers have some work to do, as U.S. natural gas inventories are far below normal levels for this time of year. With a limited window for natural gas production to continue outpacing demand, it seems unlikely stocks will head into winter anything but low. Just how low will be important, though.

If cold weather arrives early this fall, it could prove especially bullish for natural gas. However, if mild temperatures hold steady in the months ahead, it could allow strong production to overshadow inventory that looks increasingly bullish for gas and power prices.

Sept. 26 – Federal Interest Rate Decision

The U.S. Federal Reserve’s planned September meeting already suggests market pricing in a 25-basis point rate hike is a virtual lock. All things being equal, that means higher consumer interest rates, a stronger dollar and headwinds for dollar-denominated energy prices, such as oil and coal. Of course, with the market so convinced of the Fed’s course of action ahead of the big meeting, the market should have these impacts already priced in effectively.

Sept. 30 – Macedonia Referendum on Name Change

What’s in a name? Well, if you’re Macedonia, the answer may be EU and NATO membership. That may sound complex, but the connection is actually fairly straightforward. In short, Greece doesn’t like Macedonia’s name. They argue it suggests claims on Greek land and implies a questionable connection to famed Macedonian, Alexander the Great. These issues are important to Greece. They’re so important Greece has moved to block Macedonia from joining the EU and NATO.

After years of stalemate, 2018 may finally offer a breakthrough. Macedonia has a preliminary agreement with Greece to become the Republic of North Macedonia, clearing the way for EU and NATO negotiations. The Macedonian people have to agree in a vote set for the end of the month. With the EU placing a high priority on energy integration, any move to bring Macedonia into the group would likely mean greater connectivity for regional energy markets (and some heightened U.S./EU-Russia tensions to go with it).